What are the 10 Thumb Rules of Investing that Every Individual Should Know?4 min read
In this article, we will be discussing some of the basic thumb rules of investing in stocks, mutual funds, and in other financial investment avenues. So, let’s get started!
- Investing in direct stocks is of the highest lucrative options for individual investors for investment.
- For individual investors, the portfolio should only consist of 10-15 stocks and should only invest in such stocks of which business models are understood by the individual.
2) Mutual Funds:
- Mutual Fund is a great option for investors to participate in the stock market, if not participating via direct stocks. There are numerous options available for investors in the mutual fund category like large cap fund, small cap fund, Flexi cap, etc.
- Here, investors should not have more than 4-5 mutual funds in their Mutual Fund basket.
- Further, an investor should not be misled by the Net Asset Value (NAV) of the mutual fund. A fund with a low NAV should not be considered a good option every time.
3) Life Insurance:
- One of the important thumb rules of personal finance is to have life insurance.
- An individual might have numerous responsibilities like marriage, loans, child education, retirement planning, etc. Generally, an individual has assets to cover such liabilities, but there might be some lack and hence, an individual must have insurance cover for this deficit.
- Also, this insurance cover should be purely a term plan and should not be any investment-related insurance or others.
- Preferably, an E-term plan is better against ULIP or other policies.
4) Health/Medical Insurance:
- A working individual generally had a medical/health insurance cover from the company he/she is working in which is well enough. But if an individual thinks that the given health insurance cover is not enough, he/she may opt for health insurance cover other than the company’s medical insurance.
- But an individual should purchase his/her personal health insurance 3-years before retirement to maintain a track record.
5) Emergency Fund:
- It is the most important rule of personal finance where an individual is advised to maintain an emergency fund of at least 6 months of expenses if a person is employed and if a person is self-employed, then these emergency fund criteria increased to 12 months of the monthly expenses.
- This emergency fund can be parked into a flexible Fixed Deposit (FD) or low duration fund, or in a savings bank account.
6) Credit Card:
- Credit Card has several benefits which come along with the drawback of impulsive buying decision from the side of customers.
- Mostly there has been a case of high misuse of credit cards due to readily available high credit limits to the customers.
- Also, even if an individual wish to own a credit card, a single credit card is more than enough. Possessing more than 1 credit card can highly impact the behavior of the individual and might impact financial health as well.
7) Savings Account:
- Savings Account is also an integral part of the overall financial planning of an individual.
- As a thumb rule, an individual should only have a maximum of 2 savings accounts.
- Yet again like a savings bank account, an individual does not have more than one locker facility with any of the banks. Having a locker facility with all the bank accounts (which the individual owns) is not recommended.
- Also, the locker facility should be with the big banks with high capital value.
9) Portfolio Review:
- An individual should review his/her portfolio once every year specifically for the mutual fund. While for stocks, an investor should need consistently keep an eye on the performance of the stocks.
- An Investor should see that the particular mutual fund should remain in the Top-25% of the particular category. Also, the mutual fund should consistently beat the benchmark and category average.
10) Financial Planning Review:
- An individual should revisit or review his/her financial planning at the time of salary increment.
- Like a portfolio review, financial planning review should also be done once every year.
What Should Investors Do?
Above discussed factors are the 10 thumb rules of investing that an investor needs to look upon. An individual new to the market should strictly follow these thumb rules to achieve their financial goals. Therefore an investor needs to properly prepare their financial planning and should consult with good financial advisors for better results.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.